If you are wondering whether Savings bonds are taxed or not, there are general rules that owners of Savings bonds must adhere to. According to the US Treasury website:
- Interest earnings are exempt from State and Local tax
- Interest earnings are subject to Federal income tax but can be deferred until the cash in date
If bonds are cashed out and the money is used specifically to finance the cost of higher education for an individual, spouse or child, taxes on Savings bonds may be waived. However, it is important for an individual to verify the terms of their savings bonds with their tax preparers to ensure that they are completing their tax information accurately.
The reason that taxes on Savings bonds do not have to be paid at the State and local level is because the U.S. Treasury issues savings bonds. Investors redeeming savings bonds will receive a 1099-INT form in the tax year of that transaction.
The interest gained on Savings bonds is never considered a capital gain and the interest are deferred until the bonds are redeemed. However, the interest still counts as income and can be taxed accordingly to your tax bracket.
Ultimately Savings bonds are not as appealing as stocks or other investments in terms how much possible gains investors can make. But with the comfort level of what Savings bonds can provide with virtually no risk and tax breaks – what more can a low risk investor ask for? And yes, Federal taxes may need to be paid on the investment, however, taxes on Savings Bonds can be significantly less then other types of taxes from investments (especially capital gains taxes).